Macro Exercises Chap 2C

A. Instructions: choose the best answer provided in the brackets.

1- National income accounting ____________ [does/does not] enable us to measure and analyze how
much a nation is producing and consuming.

2- GDP ____________ [is/is not] the most common measure of a nation's output (income).

3- GDP is total market value of all ____________ [final/intermediate] goods and services produced in
a one-year period.

4- Output produced within a country's borders is ____________ [GNP/GDP].

5- Output produced by a country's citizens wherever they may be in the world is ____________
[GNP/GDP].

6- GNP equals GDP ____________ [plus/minus] net foreign factor income.

7- Net foreign factor income is obtained by ____________ [subtracting/adding] the foreign income of
one's citizens and ____________ [subtracting/adding] the income of residents who are not citizens.

8- GDP can be calculated by either the expenditures approach, or the income approach. The
____________ [expenditures/ income] approach calculates GDP by calculating only final output.

9- The ____________ [expenditures/ income] approach calculates GDP adding only final income
through the value added approach.

10- To avoid double counting when calculating GDP, you must ____________ [include/eliminate]
intermediate goods.

11- GDP ____________ [does/does not] include second-hand sales, government transfers, house
spouse production or any other non-market activity, and underground economic activity.

B. Circle the correct answer

1. In the circular-flow diagram, when households purchase goods and services this is known as
a.  money creation. c.  economic growth.
b.  consumer spending. d.  indexing the market basket.

2. Households receive income in the form of

a.  stocks, taxes, and savings.
b.  savings and interest.
c.  wages, profit, interest, and rent.
d.  goods and services.

3. Disposable income is income earned by households in factor markets

a.  minus taxes and government transfers.
b.  plus taxes and government transfers.
c.  minus taxes plus government transfers.
d.  plus taxes minus government transfers.

4.  The income households have available for spending or saving is

a. disposable income. c. national income.
b. personal income. d. a microeconomic variable

5. In the simplified circular-flow model of the macroeconomy, the two sectors are
a. government and management. c. banks and the rest of the world.
b. households and firms. d. capital and labor.

6. GDP is equal to
a. the sum of total factor income earned by households from firms.
b. the sum of all financial transactions in the economy.
c. the aggregate sum of profits and losses.
d. the value of what has been consumed.

7. GDP is the measure of

a. the value of productive capital in the economy.
b. total spending on domestically produced final goods and services.
c. total income received by households minus household savings.
d. all transactions between Oman firms and foreign purchasers.

8. GDP is a measure of both

a. inflation and savings.
b. interest rates and consumption.
c. income and output.
d. investment and unemployment.

9. Which of the following would be counted as investment in the national income accounts?
a. the purchase of a newly issued stock
b. the purchase of a newly built apartment house
c. the purchase of a newly minted coin
d. the payment of tuition at a private college

C. GDP as the sum of final goods and services

Given: Mr. Kim registers his two children to a private school and tuition fee cost RO 5,000. Books and
uniforms cost 2,064.50. After his children graduated, he put up a small business worth 1,633.9. The rest
of the additional money worth he needed for the business worth 1,839.5 came from his social security
upon retirement. Mr Kim is very positive because the economy is doing fine. Exports are at 1,380.1 and
imports is at 1,050.4.

Requirement: Compute for the Gross Domestic Product. Put the amount in the table below:
ITEM Amount
Personal Consumption Expenditures (C) 7064.5
Gross Private Domestic Investment (I) 1633.9
Government purchases (G) 1839.5
Net Exports 329.7
Gross Domestic Product 10867.6

D. GDP as the sum of all factor payments

Given: General Electric builds a generator and sells it to General Motors for 700,000. The
following incomes resulted from producing this generator: Wages of GE employees (400,000), Interest to
bondholders (50,000), Rentals of buildings (50,000) and Profits of GE stockholders (100,000). Income
from other countries is worth (30,000).

Requirement: Compute for Gross domestic product

Use: Table below
 ITEM Amount
Compensation of employees (400,000)
Net interest (50,000)
Rental Income (50,000)
Profits 100,000
National Income 600,000
Income from other countries 30,000
Gross Domestic Product 630,000

E. From the following table, calculate the value added:

Stage of Production Value of Sales Value Added

(1) Oil drilling 50 50
(2) Refining 65 15
(3) Shipping 80 15
(4) Retail sale 100 20
Total value added 100

Macro Exercises Chap 2D

A. MULTIPLE CHOICE. Write the correct answer only on the space before the number

_____ 1. Nominal GDP is

a. also called real GDP.
b. a more accurate measure than real GDP.
c. real GDP adjusted for changes in the price level.
d. GDP measured in current prices.

_____ 2. Nominal GDP rises when prices, even if there is no increase in actual production. If
hamburgers cost $2.00 this year but cost only $1.50 last year, then
a. 100 hamburgers will contribute $200 to this year’s nominal GDP
b. 100 hamburgers will contribute only $150 to last year’s nominal GDP
c. 100 hamburgers will contribute only $150 in each year GDP
d. both a and b are correct

______ 3. Current consumption spending is most strongly determined by

a. inventory levels.
b. investment levels.
c. household income.
d. interest rates.

_____ 4. When the consumption function is plotted on a graph, the intercept on the vertical axis indicates
a. the marginal propensity to consume.
b. autonomous consumption spending.
c. disposable income.
d. the equilibrium level of income.

_____5. When the consumption function is plotted on a graph, the horizontal axis measures
a. the interest rate.
b. investment spending.
c. the level of inventories.
d. disposable income.
_____ 6. If real GDP increases it means:
a. That prices have increased
b. That the quantity of output has increased
c. That either the quantity of output or prices have increased
d. None of the above

_____ 7. Suppose nominal GDP in 1967 was $1 trillion and nominal GDP in 1977 was $2 trillion. The
1967 and 1977 price indexes were 100 and 250 respectively. Based on these numbers:
a. Real GDP increased over the 10 years
b. Real GDP decreased over the ten years
c. Real GDP remained constant
d. Nominal GDP fell over the 10 years

_____ 8. If the real GDP is 1000 and Investment is 150, Government Spending is 250 and Net
Exports equals -100, then Consumption must be:

a. 400 b. 500 c. 600 d. 700

_____ 9. The United States has a high average propensity to consume. This means:
a. The marginal propensity to consume is low
b. The average rate of saving is high
c. Americans consume a large portion of the total disposable income
d. On average the propensity to save is high

_____ 10. The marginal propensity to consume is:

a. The change in consumer spending divided by the change in disposable income
b. Total consumer spending divided by total income
c. Disposable income divided by consumption
d. The change in disposable income divided by the change in consumption

_____ 11. A consumption function is: C = 500 + .80 Yd. This means:
a. Consumers will save 80 cents out of each additional dollar in disposable income
b. Consumers will spend 500 in addition to current income
c. Consumers will spend 500 out of current income
d. The marginal propensity to consume is .20

_____ 12. The most significant factor determining a nation's consumption and saving is
a. the rate of inflation
b. technological change
c. the real rate of interest
d. disposable income

_____ 13. If consumption spending increases from $358 to $367 billion when disposable income
increases from $412 to $427 billion, the marginal propensity to consume is
a. 0.4 b. 0.6 c. 0.8 d. 0.9

_____ 14. If disposable income is $375 billion and the marginal propensity to consume is 0.8, it can be
concluded that
a. the average propensity to consume is also 0.8
b. consumption is $325 billion
c. saving is $75 billion
d. the marginal propensity to save is 0.6

_____ 15. The slope of the consumption schedule or line is the

a. marginal propensity to consume
b. average propensity to consume
c. marginal propensity to save
d. average propensity to save

B. Solve/answer as required.

16-17 In 2009, the disposable income of households amounted to 6,638 billion. Out of this amount,
consumers spent 6,490 billion and saved only 148 billion. Calculate the average propensity to consume.
Calculation/Answer:

Ans : (C) to disposable income (DI), or APC = C / DI = 6638/6490 = 1.02

18-Why do rich people have a higher marginal propensity to save than poor people?
Ans: Rich people have a lower MPC and thus a higher MPS. Additional income
amounts are not entirely spent. Poor people may spend the entire amount of increases in
income.

19-20 How do households dissave? Where do they get the money to finance their extra consumption?
Can everyone dissave at the same time?

Ans: Dissaving occurs whenever people spend more money than they earn. For
example, if someone earns $1,000 a month but spends $1,100 per month, he is said to be
dissaving. Students typically dissave when they are in college. For example, Jill attends a
private college that costs $15,000 per year, but she earns only $5,000 per year at her parttime
job. Jill is thus spending more money than she is earning and is dissaving. It is possible
for her to dissave through withdrawals from savings accounts or borrowing money.
Although it is possible for individuals to dissave, it is not possible for everyone to dissave.
Since most dissavings occur through borrowing money, someone else must be saving money
for the other people to be borrowing
Macro Exercise Chap 3

Answer as required.

_____ 1- Which of the following would NOT cause a shift in AD?

Ans. D A fall in the cost of production.

_____ 2- Shifts in aggregate demand. Choose the appropriate word/s to complete the
explanation of shifts of an aggregate demand curve and movements along demand curves.

Ans. When the price level in there economy changes, there will a movement along the
aggregate demand curve. If the price level increases, there will be a movement upwards and to
the left on the aggregate demand curve. If there is a decrease in the price level, then there will
be a movement downwards to the right. However, if factors other than the price level change
then the whole aggregate demand curve will shift, either to the right or to the left. For example,
if there is a reduction in income tax, then the aggregate demand curve will shift to the right. If
however, the rate of income tax increases, then the demand curve shift to the left.

_____ 3- Shifts in aggregate supply. Which of the following would NOT cause a shift in AS?
Ans. A. the level of government spending

_____ 4- If the price of imports rose, caused by a change in the value of the money then the AS
would shift to the:
B. left

5- Shifts in aggregate supply. Which of the following might have caused the shift in aggregate
supply shown in the diagram below? Tick all the answers that apply.

____ A. An improvement in technology

____ B. A depreciation in the exchange rate
__✔_ C. An increase in costs
__✔_ D. A reduction in government expenditure
____ E. A cut in income tax
__✔_ F. An increase in wage levels
6- Shifts in aggregate supply and demand. Which of the following would cause the shift shown
in the diagram below? Tick all the answers that apply.

____ A. The government increase interest rates

___✔ B. The rate of value-added tax is increased
____ C. Controls on bank lending are relaxed
___✔ D. The government allows tax relief on spending
___✔ E. The rate of income tax is reduced

_____ 7- When using AD/AS analysis to show changes within an economy, which of the
following would NOT need to be considered when looking at changes to economic growth?

Ans. Increased availability of social capital

_____ 8- Aggregate supply. Which of the following is a major influence on AS?

Ans. Quality of factors of production

_____ 9- Shifts in aggregate supply. Choose the appropriate word/s to complete the
explanation of shifts of an aggregate supply curve.
Ans. The short run AS curve slopes upward. In the short-run, firms respond to price increases
by supplying more goods but in the long-run supply may not always respond to an increase in
price levels. In the short run changes like a reduction in profits tax will shift the aggregate supply
curve to the left whereas a reduction i8n wage costs would shift the aggregate supply curve to
the right.

_____ 10- Shifts in aggregate supply and demand. The less responsive is AS to a rise in AD,
the more prices will rise for a given increase in AD.
Ans. True
fasle
_____ 11- Shifts in aggregate supply and demand. An increase in expenditure tax will shift both
the aggregate demand and supply curves to the left.
Ans. True
 _____ 12- Shifts in aggregate supply and demand. An improvement in productivity will shift both
the aggregate demand and supply curves to the right.
Ans. False

Review questions
 What is the economic reason that the aggregate supply curve, or short run
aggregate supply curve, slopes up?
If a firm gets a higher price, they will make a higher profit by selling more, so quantity
supplied increases when price increases. The SRAS curve slopes up for two reasons:
sticky input prices (like wages) and sticky output prices 

 What are the components of the aggregate demand curve?

Aggregate demand is the sum of four components: consumption, investment,
government spending, and net exports.

 What are the economic reasons that the aggregate demand curve slopes down?
It slopes downward because of the wealth effect on consumption, the interest rate effect
on investment, and the international trade effect on net exports

 Briefly explain the reason for the near-vertical shape of the aggregate supply
curve, or short run aggregate supply curve, on its far right.
At the far right, the aggregate supply curve becomes nearly vertical. At this quantity,
higher prices for outputs cannot encourage additional output because even if firms want
to expand output, the inputs of labor and machinery in the economy are fully employed.

 What is potential GDP?

 It assumes that an economy has achieved full employment and that aggregate demand
does not exceed aggregate supply.
Macro Exercise Chap 4

A. MULTIPLE CHOICE. Write the correct answer only on the space before the number

_____ 1. A fall in consumer spending:

Ans. Can cause macro instability

______ 2. The most significant factor determining a nation’s consumption and saving is
Ans. Disposable income

_____3. When the consumption function is plotted on a graph, the horizontal axis measures
Ans. Disposable income

_____ 4. As the disposable income of the economy increases:

Ans. The APC falls and APS rises

_____ 5. What is the primary determinant of savings?

Ans. The rate of interest

_____ 6. The marginal propensity to consume is:

Ans. Change in consumer spending divided by change in disposable income

_____ 7. Jasmine just received a raise, which increased her disposable income by 60 RO per
month. The effect is
Ans. a movement to the right along her existing consumption schedule

_____ 8. If the value of the marginal propensity to consume is 0.6 and real GDP falls by 25
million RO, this was caused by a decrease in aggregate expenditures of:

_____ 9. Kim’s house has increased in value by almost 50% due to a booming housing market.
Kim finds he is saving less and spending more on items such as new furniture and appliances.
This is an example of:

Ans. The wealth effect

_____ 10. The most significant factor determining a nation's consumption and saving is
Ans. Disposable income

_____ 11. If disposable income is $375 billion and the marginal propensity to consume is 0.8, it
can be concluded that
Ans. Saving is $75 billion

_____ 12. Aggregate demand will shift to the right if consumers:

Ans. Are more confident about economic future

B. Solve/answer as required.

1- In 2009, the disposable income of households amounted to 6,890 billion. Out of this amount,
consumers spent 6,698 billion and saved only 232 billion. Calculate the average propensity to
consume.
Calculation/Answer:

APC = consumer expenditures divided by disposable income

APC = C / DI
APC = 6890 / 6698
APC = 1.028

2- If consumption spending increases from $358 to $367 billion when disposable income
increases from $412 to $427 billion, the marginal propensity to consume is
Ans.
Marginal propensity to consume = change in consumption / change in disposable income
MPC = ∆C / ∆DI
MPC = 367-358 / 427-412
MPC = 9 / 15
MPC = 0.6

3- If for an additional 10 million RO in income, there is a 3 million RO increase in saving, we

can conclude that the marginal propensity to consume is
Ans.
MPC = C / DI
Consumption = disposable income - savings
C = DI - S
C = 10 - 3
C=7
MPC = 7 / 10
MPC = 0.7

Macro Exercise Chap 5

I. MULTIPLE CHOICES. STRICTLY WRITE FINAL ANSWER IN PEN AND ONLY ON THE
SPACE PROVIDED BEFORE THE NUMBER.
_____1- Which one of the following best explains the variability of investment?
Ans. fluctuation in the level of profits

_____2- Which of the following relationship is an inverse one?

Ans. The relationship between investment spending and the rate of interest

_____3- Which of the following would increase investment demand?

Ans. A decrease in the capital goods in hand
_____4- A firm will invest up to the point where
Ans. Current profit is equal to the rate of interest
_____5- An investment demand curve shows
Ans. The amount of investment demanded by the economy at a series of real interest rate

_____6- What is the result of having loanable funds allocated by the market mechanism?
Ans. Those investment projects with the high rates of return will be financed; those with low rates of
return will not be financed

_____7- As the MPS increases, the multiplier will:

Ans. Decrease

_____8- Assume that the market for computers begins in equilibrium. Them there is a decrease in the
price of Pentium processors used in the production of computers. When the new equilibrium is reached,
Ans. the price of computers will have fallen and quantity will have risen

_____9. Which of the following would cause business investment spending to rise?
Ans. a decrease in the corporate profits tax rate from 48% to 34%

_____10- The accelerator theory of investment says that induced investment is determined by:
Ans. The rate of change of national income

_____11- Which of the following would cause the demand curve for cars to shift to the left?
Ans. An increase in the price of cars

_____12- . If you take out a bank loan to buy a car

Ans. the loan is an asset for the bank and a liability for you.

II. Problem-solving. Show calculations in the space provided.

1- An investment project costs an initial 100,000 and has a lifespan of 5 years. The proceeds in each of
the first 2 years are 30,000 and 40,000 of the final 3 years. Calculate the rate of return.

2- You put $1000 into an investment yielding 6% annual interest; you left the money in for two years.
How much interest do you get at the end of those two years?

Ans. Given
n=2
I = 6%
PV = 1000
FV = ?
FV = PV (1 + I )n
FV = 1000 (1 + 6%)2
FV = 1000 ( 1 + 0.06)2
FV = 1000 (1.06)2
FV = 1123.6

3- You invested $500 and received $650 after three years. What had been the interest rate?
Ans. Given
FV = 650
PV = 500
N=3
I=?
FV = PV (1 + I )n
650 = 500(1 + I )3
I = 9.1%

4- If the nominal interest rate is 10 percent and the inflation rate is 6 percent, how much is the real interest
rate?
Ans. Real interest rate = nominal interest rate – inflation rate
Real interest rate = 10% – 6%
Real interest rate is 4%

5- What is the real interest rate paid on a credit card loan bearing 18 percent interest per year, if the rate of
inflation is: a) zero? __18%___ b) 3%? _15%__ c) 6%? 12%__ d) 12%? _6%_ e) 18%?
_0%__

6- What is the multiplier equal in each of the following cases?

a) MPC = 0.75 __4____ b) MPC = 0.60 __2.5___ c) MPS = 0.20 ___5__

Macro Exercise Chap 7

I. MULTIPLE CHOICES. STRICTLY WRITE FINAL ANSWER IN PEN AND ONLY ON THE
SPACE PROVIDED BEFORE THE NUMBER.

_____1. Inflation affects borrowers and lenders differently. After signing a contract with a fixed nominal
interest rate, it can be expected that
Ans. Borrower will hope that prices rise

_____2. If actual inflation is less than the expected rate of inflation, then probably
a. the borrower gains at the expense of the lender.
Ans.

_____3. Price indexes measure

Ans. Fluctuations in the aggregate price level

_____4. Which of the following statements is true?

Ans. Borrowers gain at the expense of lenders if the actual inflation rate is lower than expected.
_____5. If lenders expect higher inflation in years to come, they will most likely
Ans. Increase the nominal rate of interest
_____6. Jake loaned Elmer $5,000 for one year at a nominal interest rate of 10 percent. After Elmer
repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elmer
gave him that he could before he loaned Elmer the $5,000. From this we can conclude that the rate of
inflation during the year was
Ans. 14 percent

II. Problem-solving. Show calculations on separate sheet.

1- Use the table below to answer the following questions

Year Price of rice Price of potato
2007 $25 $30
2008 $30 $45

A. Ques: Suppose that the basket of goods in the CPI consisted of 10 units of rice and 5 units
of potato. What is the consumer price index for 2008 if the base year is 2007?
Ans. Given
Ct = 525
C0 = 400
CPI = ?
CPI = (Ct / C0) *100
CPI = (525 / 400)*100
CPI = 131.25

B. Ques: What is the inflation rate for 2008?

Ans. Inflation = {(CPI2 – CPI1)/CPI1 }*100
Inflation = {(131.25 – 100)/100}*100
Inflation = 31.25

In one country, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of
bread, 3 robes and 2 gallons of gasoline. The per-unit prices of these goods have been as
follows:

Year Apples Bread Robes Gasoline

1999 $1.00 $2.00 $10.00 $1.00
2000 $1.00 $1.50 $9.00 $1.50
2001 $2.00 $2.00 $11.00 $2.00
2002 $3.00 $3.00 $15.00 $2.50

A. Ques: What was the inflation rate, as measured by the CPI, between 1999 and 2000?

Ans. 1999 CPI1 = (Ct/ C0)*100

CPI1 = (45/45)*100
1999 CPI1 = 100

2000 CPI2 = (Ct / C0)*100

 CPI2 = (41 / 45)*100
2000 CPI2 = 91.11
Inflation rate = {(CPI2 – CPI1)/CPI1}*100
Inflation rate = {(91.11 – 100)/ 100}*100
Inflation rate = -8.89%
B. Ques: What was the inflation rate, as measured by the CPI, between 2001 and 2002?

Ans. 2001 CPI3 = (Ct/ C0)*100

CPI3 = (55 / 41)*100
CPI3 = 134.14

2002 CPI4 = (Ct/ C0)*100

CPI4 = (77 / 55)*100
CPI4 = 140

Inflation rate = {(CPI4 – CPI3)/CPI3}*100

Inflation rate = {(140- 134.14)/ 134.14}*100
Inflation rate = 4.36%

3- Complete each table and describe the result.

Table A. 2008 Student Budget
Item Average Price Average Quantity Average Expenditure
Purchased per Month per Month in 2008
Food 2.00 R0 30 60 R0
Hostel 14.00 R0 2 28 R0
Bus 10.00 R0 2 20 R0
Total 108 R0
Table A
shows Average expenditure ________________108 R0_________________

Table B. 2009 Student Budget

Item Price Average Quantity Cost of 2008 Increase over 2008
Purchased per Student Budget in (in percentage)
Month 2009 Prices
Food 5.00 30 150 150%
Hostel 15.00 2 30 7.14%
Bus 12.00 2 24 20%
Total 204 177.14%
Table B shows that the Price index based on 2008 is equal to ___188.88____

4. Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to
198?
Ans. All of three shows the same inflation rate

5. In 1969, Don bought a Dodge Dart for $2,500. He drove this car until 2003 when he bought a Honda
Civic for $18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what’s the price
of Dodge Dart in 2003 prices?
Ans. 12262
III. Answer the following questions briefly:

1- What is inflation and its causes? Mention at least three causes.

Ans. inflation is the long term rise in the prices of goods and services caused by the
devaluation of currency.
Causes of inflation
A Inflation is primarily caused by an increase in the money supply that outpaces
economic growth.
B Demand pull effect: The increase in liquidity and demand for consumer goods
results in an increase in demand for products. As a result of the increased demand,
companies will raise prices to the level the consumer will bear in order to balance
supply and demand.
C Nations debt: As a country’s debt increases, the government has two options:
they can either raise taxes or print more money to pay off the debt.

2- Why do inflation undermines public morale?

Ans. As in the inflation the purchasing power of people decreases to overcome the situation of
starving some people do involve them selves in criminal activities like theft and snatching by this
way the inflation undermines the public morale.

3- Explain the redistributive effects of inflation

Ans. A borrower who pays an interest rate lower than the inflation rate, is in fact paying back less
in purchasing power to the lender than what he had borrowed. The borrower gains and the lender
loses as long as the interest rate is not adjusted for the rate of inflation
Macro Exercise Chap 8

I. MULTIPLE CHOICES. STRICTLY WRITE FINAL ANSWER IN PEN AND ONLY ON THE SPACE
PROVIDED BEFORE THE NUMBER.

_____1. The money supply is

Ans. the total value of the nation’s store of gold.

_____2. Which of the following is NOT a role played by money?

Ans. a unit of account.
_____3. The money supply expands when
Ans. you deposit your paycheck into your savings account.
_____4. The public holds money in order
Ans. To be wealthy

_____5. Which of the following statement is false?

Ans. Omani riyals are used as money only within Omani boarders
_____6. Which of the following is not commodity money?
Ans. Cigarettes

_____7. Suppose transactions are conducted in pesos, and prices are quoted in dollars. The primary
function(s) of the peso in this case is (are)
Ans. Medium of exchange

_____8. When you put your spare change into your child’s coin bank, money is serving as a
Ans. Store of value

_____9. Before you buy your new car, you visit four local dealerships and collect information on the prices
and features of the cars. In this case, you are using money as a
Ans. Unit of account

_____10. Which of the following is the most common form of money?

Ans. Paper money

_____11. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the
Fed purchases $10 million worth of government bonds from Bank INF, the amount of deposits held by the
entire banking system will ultimately
Ans. increase by $10 million.
_____12. The size of the country’s money supply
Ans. is determined jointly by the government and the banking system.
_____13. The monetary base is
Ans. the sum of currency in circulation and bank reserves.

_____14. Which of the following item is a component of the monetary base but is not part of the money
supply?
Ans. bank reserves

_____15- the money multiplier is the ratio of

Ans. bank reserves to bank deposits

II. Problem-solving

1- Suppose there is 120 billion of cash and that half of this is cash held in bank vaults as required
reserves. How large is the money supply be if the required reserves ratio is:
a) 10%

b) 12.5%

c) 16 ⅔%

Ans. At 10%
Money supply = currency + reserves (1/ rd)
Money supply = 60 billion + 60 billion (1/0.1)
Money supply = 660 billion

At 12.5%
Money supply = 60 billion + 60 billion (1/ 0.125)
Money supply = 540 billion

At 16 2/3%
Money supply = 60 billion + 60 billion (1/ 0.1667)
Money supply = 419.93 billion

2. Suppose the required reserve is 30%. If primary deposit is OR 2000, calculate the cash reserve for
each of the banks and credit creation. What is the money multiplier?

Banks Primary Deposits Cash Reserves Credit or creation of

(RO) Ratio (30%) derivative deposits
(RO)
First Bank 6666.67 29.99 6666.67
Second Bank 22222.22 9 246913.55
Third Bank 246913.55 0.81 304831.54
All Bank’s total